Long-Term Care (LTC) insurance policies cover services including nursing home stays, assisted living facility stays, home health care, adult day care and personal care services. Subject to benefit eligibility requirements, policies typically reimburse actual long-term care expenses up to a specified daily maximum for a total amount up to a specified lifetime maximum, with indemnity and disability benefit payment plans also available. LTC insurance policies have typically been sold as standalone health insurance coverage.
Although standalone LTC insurance policies are the norm in the market today, surveys show many people do not buy these policies, particularly while they are young, for two primary reasons: 1) young people tend not to realistically accept that they may need LTC services one day, and hence will not pay for insurance they believe they will never use, and, 2) people do not think that they can afford to pay for LTCI from their current income. As people age, they often become more realistic about the need for LTC, and desire alternative ways to finance this insurance protection.
Occasionally LTC benefits have been imbedded in, or as riders to, life insurance and annuity policies, but this has historically been fairly minimal, with unclear tax implications. Recently, the landscape has changed. In August 2006, the Pension Protection Act of 2006 (PPA) was enacted. It includes new tax incentives for the purchase of certain life insurance and annuity policies with LTC benefits—referred to herein as “Combination LTC Products.” The PPA provides incentives for the purchase of Combination LTC Products, in an attempt to increase the private insurance coverage of long term care expenses, thereby relieving some of the strain on Medicare and Medicaid. Lack of LTC coverage for our aging population is an increasingly urgent problem; as LTC risks increase sharply with advancing age, and the cost of LTC insurance is often unaffordable unless funding begins at a relatively early age.
The PPA encourages purchase of private LTC insurance (LTCI) by those who will or have already invested in life insurance and/or annuities. The PPA provides favorable tax treatment for purchase or exchange of in-force annuity and life insurance policies for Combination LTC Products starting Jan. 1, 2010. This allows the utilization of the value of life insurance and/or annuities to provide LTCI protection. This not only provides incentives for individuals and groups to purchase such Combination LTC Products, but also for life and health insurers to develop new Combination LTC Products to meet the varying needs and financial resources of the rapidly growing and underserved LTCI market. The passage of the PPA, with its Combination LTC Product tax advantages effective Jan. 1, 2010, has created a certain urgency in the development of such products.
Combination LTC Products are characterized by LTC benefits embedded in life insurance or annuities. The charges for the LTC benefits are deducted periodically (typically monthly) from the account value of the policy. The typical pricing of these Combination LTC Products has been either a level charge for the elected LTC benefits based on issue age, or level basis points (a level percentage of the account value in the policy), also based on issue age. Since the likelihood of using long term care services increases substantially with advancing age, the charges for such coverage, if financed on a year to year basis, can become unaffordable at higher ages, just when the insured party might need the coverage. The “levelized” pricing structures mentioned above address that problem by providing significant financing of the later cost by the payments made in the earlier durations of the policy. However, these pricing structures have their own drawbacks, such as smaller growth in annuity (or life insurance) account value, especially in the early durations of the coverage, and less LTC coverage/benefits in the policy. It would be desirable to address these issues.